Global Financial Crisis of 2008: Impact on International Financial Institutions

This article discusses the impact of the 2008 global financial crisis on international financial institutions such as IMF, World Bank, Islamic Development Bank, African Development Bank, and Asian Development Bank. It also highlights the limitations exposed by these institutions and the challenges faced by them. The article also covers the causes of the crisis and the problems faced by modern mortgage financial practices.

International Political Economy
Global Financial Crisis of 2008
Student name

Introduction
The global financial crisis was begun in early to mid-2007 with major credit crunch.
In which there was a heavy loss of the US stakeholders in the value of sum major mortgages
begun due to the liquidity crisis (Cohn, 2016). In 2008 the crunch had worsen as stock market
around the sphere crashed down and became highly unstable. It majorly affected the
customers confidence and as many investors tighten their belts due to facing the fear for
future. The 2008 financial crisis is known as the worst economic disaster. It was occurred
despite the efforts are made by federal reserves and treasury department. This all leads to the
great depression (Amadeo, 2018).
The financial crisis was caused due to the deregulation in the monetary industry.
Banks at that time acceptable to get involve in hedge funds trading with derivatives. Banks
then claimed more mortgages to support the profitable sales of these derivatives. They
created interest only loans, which became affordable to subprime debtors. Moreover, the
housing values started falling as supply-outplaced demand and due to this, trapped house
owners was unable to afford the payments. This highlights that when the values of derivatives
crumbled, ban ks clogged lending and hence this generated the financial crisis, which leads to
the great recession (Chor, & Manova, 2012).
Limitation exposed by IMF and World Bank
The limitation of the international financial institution majorly highlights about the
World Bank and IMF. In which the advances made up mortgage backed securities has
organizational flaws including a lack of proper vetting of leaders and the teaser rates that
essentially guarantees default in many cases. In addition, when they started to blow holes in
the stability sheet of financial institutions, they apprehended that no one had correctly pricing
in the threats on these derivatives. Therefore, the inter-lending between the companies
stopped and the credit- crunch united with the mortgage meltdown to generate the credit
crisis which frozen the financial method when they needed liquid capital at its peak. In order
to handle the situation Federal Reserve has to drive in billions into the system in order to save
it but it still ended up with great recession (Obstfeld, 2012).
Islamic development bank
An Islamic development bank, IMF compares the performances of Islamic banks
and conventional banks throughout the recent financial crisis, and they found that Islamic

banks displayed stronger resilience during the worldwide financial crisis. However, other
than this, it was also found that Islamic banks also faced greater losses when the crisis hits the
real economy. Many economists highlighted the effects of the financial crisis on banks
profitability, credit and asset growth in the countries where both the banks having a
significant market share. There was a major impact on the change in profitability, bank
lending, banks assets and external bank rating (Hasan, & Dridi, 2011). The below given
graph highlights about the effects faced by the Islamic development banks:
(Source: Ahmed, 2010)
From the above graph, it was analysed that Islamic banks differently faced the global
financial crisis from the conventional banks likewise, smaller investments portfolio, lower
leverage. Before the crisis, banks were in more gainful state than their conventional upper
class peers were running up to the crisis. Then at initial stage, Islamic banks faced a very
little impact on profitability at the early staged whereas credits and assets were still remained
at the stronger position. During the global crisis period, Islamic banks were having

opportunities to prove their resilience. Moreover, the challenges faced by the Islamic banks
were building up the functioning infrastructure for its liquidity management. It was very
much challenging to align reforms efforts with the global financial regulatory reforms. Lastly,
it was difficult to harmonizing regulations and merchandises to raise the efficient and
sustainable progress of the Islamic banking industry (Ahmed, 2010).
African development bank
Global financial crises 2008 also have had a negative impact on the African
development banks and on overall African economies. There were the four main sectors,
which were adversely affected by the crisis likewise, trade, tourism, infrastructure and
agriculture, which were like lifeblood to the draining economies. Likewise, in tourism
concern the crisis took away the entire tourist from the key destinations on which such
drowning economies relies on. Furthermore, in terms infrastructure, due to the lack of
financing bought the projects to the halt. Moreover, the main working of the development
bank to contribute to the economic development and to make social progress both
individually and collectively. For the same the reaction of the African development bank
towards the worldwide financial crisis at the regional level was, they created the quick
disbursement loan facilities as well emergency liquidity facilities in order to improve the
worsen conditions due to the crisis.
Other than this they also highlighted the problems of the overall concern on which the
top most and the current movements and developments in the international trading system,
weather change, food safety, development impression of investments, development of the
intellectual property rights. Due to the global financial crisis it had directed to the drop in
foreign direct investment and along with this, there was also lack of fulfilment of the
development assistance commitment. For this, the applying the three new P’s is the political
solidarity, policy space and productive capacity lead to the new approaches to development
and to over the challenges which the banks were facing. Still, due to the financial and
economic crisis economic activities in Africa were hindering the progress towards attaining
the continent’s development aims. With this decline in economic growth, the sums of
unemployed as well as deficiency rates were risen up. Still Africa endures to faces challenges
in the financing progress as the global financial crisis decreased both internal as well as
outward resources. Declines in GDP from 25% to 19.3% in 2009, while tax revenue to GDP
by 21% (Berman, & Martin, 2012).

Moreover, all these measures highlights the serious limitations, from which the
lessons to be learned by the African development bank that they should emphasis on
monetary policy. They must also explicitly take into an account growth and the financial
stability issues in order to reduce the impacts of shudders to the economy. According to the
UNCTAD, the crisis should also focus on needs for African countries in order to have policy
space to respond to the contrary shocks (Frankel, & Saravelos, 2012).
Asian development bank
Another international financial institution faced the global financial crisis 2008 was
the Asian development bank which faced the backdrop of the commodity price shocks
which ended up to the crisis which was majorly harmful for the southern Asia. The instant
challenge for the area’s policymaker was to make options for reacting to the sudden
economic disruption, funnelling into Asia though financial and trade transmission channels.
Other than this, even more challenging due to the financial crisis was to deal with the
immediate issues with the strategic eye on avoiding the disruption in the regions who are
continuing economic transformation. Moreover the challenges were their were broad range of
fiscal measures which were not balance the demand towards domestic consumption and
investment. Other than this, there was a major challenge in strengthening the regional
financial safety in order to improve the crisis prevention and mitigation. Lastly, the Asian
development bank will be facing challenge in establishing a more effective framework for
corporation in order to mitigate political tensions from spillovers and to find out the wider
scope for collective actions (Grimes, 2011).
Overall description
Overall the problems of 2008 crisis faced by the other financial institution likewise,
IMF, World Bank set out certain important shortcomings of the modern mortgage financial
practices likewise the first problem related to the crisis which was arouse was origination and
subcontracting. One of the hazardous innovations was the separation origination from the
ownership and servicing of loans. At initials, the effort done by the bank was to form an
application for loan up to loan disbursement. This particular step helps in analysing the
creditworthiness of the potential borrower. However, later when the separation origination
from ownership of a advance, it was possible to sell or securitize a advance before its
maturity, but also to evade the long-term consequences of a evil choice borrower. This ethical
hazard situation generates spurs for the credit growth, deteriorates the superiority of the

borrowers, and may subsidize to the uncontrolled generation of credit risk in the financial
system. Problem second was securitization-, which means it a formation and the insurance
of debt safeties or bonds whose principle and interest originate from the cash flows, which
generates by the separate pool of possessions. Traditionally it was use to deliver liquidity for
less liquid assets. However, modern mortgage practices have transformed securitization into a
mechanism of contagion and mispriced dangerous securities. Credit ratings has underwritten
to the liquidity of the securitized problems, but failed to convey vibrant and fair information
on their hazardousness to the global investors. This mechanism diminishes the effectiveness
of the traditional tools of credit growth control (The economist, 2013).
Thirdly, liberalization was also affected by the global financial crisis, likewise, there
was a fragile regulation and supervision replicated not only the technical difficulties along
with that political pressure for supervisory tolerance. Information, which helped the market
discipline and limit the excessive lending has proven the less guarantee, was not emphasis of
regulation, suffered from the lack of transparency. In addition, it also replicated the lack of
information related to technical problems and was unwillingness of recognized intermediaries
to share data on their borrowers. Lastly, the crisis also exposed some other actual difficulties
in worldwide finance too other than this it would be rational enough to say that worldwide
financial reforms had courageous and promising beginning. The growth was made operative,
but many other difficulties are there in the way (Singh, 2017).

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